March 24, 2022

Update on Proposed Filing Requirements for Trusts

Taxpayers should be aware of proposed changes to federal trust filing and reporting measures and other significant draft tax legislation updates. On February 4th, 2022 the federal government of Canada (the “Government”) released an extensive package of draft legislation to implement various new tax measures for consultation.

This package shed some light on uncertainties regarding unenacted trust beneficiary reporting rules announced in 2018 that were originally intended to apply for taxation years of trusts that ended after December 30, 2021. After some confusion regarding its implications for the current year, the Canada Revenue Agency (CRA) has since clarified that the proposed changes to trust reporting will apply to taxation years of trusts that end after December 30, 2022, but the exact date these changes will come into effect has not yet been specified. If the legislation is enacted as and when currently predicted, the first T3 tax returns in which additional disclosures would have to be reported to the CRA are those to be filed in early 2023 for the 2022 taxation year. For now, trustees and others engaged in trust tax compliance have another year to collect the required personal information on beneficiaries and other required persons.

Current Trust Reporting Requirements (as of March 2022)

At present, a trust that does not earn income or make distributions in a year is generally not required to file an annual (T3) return of income. A trust is required to file a T3 return if the trust has tax payable or it distributes all or part of its income or capital to its beneficiaries. Even if a trust is required to file a return of income for a year, there is no requirement for the trust to report the identity of all its beneficiaries.

Given the above, the Government perceives that there are gaps in the information they currently collect with respect to trusts and seeks to close such gaps. Budget 2017 announced the Government’s intention to examine ways to expand information collected with respect to trusts.

Proposed Federal Trust Filing and Reporting Measures

The draft amendments to the Income Tax Act (ITA) and related regulations were first released in July 2018, and provided that:

  1. trusts resident in Canada will be required to file a tax return every year regardless of whether the trust has tax payable or distributes a portion of its income,
  2. trusts resident in Canada and non-resident trusts that are required to file a return will be required to list each person who at any time in the year was a trustee, beneficiary or settlor or had the ability to exert control over trustee decisions over the allocation of trust income or capital, and to provide certain personal information about those persons (name, address, date of birth (for individuals), the jurisdiction of residence and social insurance number or other applicable taxpayer identification number) (“Beneficial Ownership and Control Information”),
  3. new penalties will be introduced for failure to file a return containing trust Beneficial Ownership and Control Information — including, notably, a penalty of no less than 5% of the highest fair market value of the trust property during the year where the failure to file was done knowingly, or due to gross negligence.

Pursuant to the draft legislation released on February 4, 2022 (see sections 14-18), disclosure of Beneficial Ownership and Control Information on a T3 return is not required if the information is subject to solicitor-client privilege.

The draft legislation also provides that bare trusts, which are arrangements under which a trust can reasonably be considered to act as agent for all the beneficiaries under the trust with respect to all dealings with all of the trust’s property, are now explicitly subject to the new trust filing and reporting measures. Previously, bare trusts were generally not required to file T3 returns.

For more information please reach out to a member of our team.